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In a special section of the January 17 edition of The Economist, Edward Lucas gives a broad overview of the world energy outlook and the future for renewable energy. His is an optimistic forecast for cleaner, cheaper and more plentiful energy. His article can be found online here.

First, the article provides this view of current world energy production and consumption:

This picture doesn’t present a very optimistic view. Almost 60% of energy production is “wasted energy.” Oil still provides 33% of all energy consumed, while wind supplies only 1.1%, and solar only 0.2%. And the EIA projects that global demand for energy will increase by 37% in the next 25 years.

But Lucas says things are changing. Solar electricity, and ways of storing it, are becoming cheaper and better. China invested $56 billion in renewable energy in 2013, and it installed 13 gigawatts of solar, more than its new fossil-fuel and nuclear capacity combined. Wind now provides a third of Denmark’s energy supply and a fifth of Spain’s. Solar is becoming competitive with traditional fossil fuels, and costs are continuing to decline.

Lucas says solar is pulling ahead of wind. In 2013, additions of solar electricity generation exceeded that in wind for the first time. The cost of solar panels has reduced by a factor of five in the past six years. EIA predicts that solar will provide 16% of world electric power by 2050.

Lucas also describes “distributed generation” – domestic fuel cells, rooftop solar generation, “net metering rules” — and breakthroughs in electricity storage, up to now the stumbling block for wind and solar generation, which is intermittent and unreliable. And he recounts breakthroughs in reducing energy consumption, including better building insulation and more efficient vehicles. Lucas mentions Austin, Texas, where “7,000 households have signed up for a scheme in which they get an $85 rebate on an internet-enabled thermostat.” With those thermostats, “Austin Energy can shave 10 MW from its summer peak demand.”

Lucas’s five keys for the future of energy: (1) abundant energy, largely from the growth of cheap solar; (2) development of storage technologies; (3) growth of distributive energy – making consumers small producers and storers of energy; (4) intelligent use of energy – smart meters, better management of electricity distribution, “smart grids”; and (5) new business models to finance these new energy systems.

The news is filled with stories predicting the effect of falling oil prices on US production. Good news for the economy, bad news for the Texas oil and gas industry. Will the rig count fall? Will companies go into bankruptcy? Only time will tell.

The answer may depend on OPEC. OPEC countries produce about one-third of the world’s total oil each month. OPEC countries have about 80 percent of the world’s oil reserves. Predictions of OPEC’s demise are greatly exaggerated. But US production has increased to almost 9 million barrels a day, close to Saudi Arabia’s production. Texas is responsible for a big part of that increase:

Clearly the increased US production, combined with the predictable decline in demand and the slowdown of China’s and Europe’s economies, is affecting the world oil price. OPEC convenes on November 27, and pundits are guessing what it will do. On October 29, OPEC’s Secretary-General Abdalla El-Badri, cautioned calm, after a conference in London: “We don’t see really fundamental changes in the supply side or the demand side. Unfortunately everyone is panicking. The press is panicking, consumers are panicking. We really should think and see how this will develop.”

El-Badri has a point. Looked at over the long term, as shown below, this may be but another adjustment in world prices.

Not all OPEC countries are the same. Some countries will be squeezed by oil prices below $80:

So far, the falling oil price appears to have had little effect on drilling activities in Texas. The Texas Petro Index published by the Texas Alliance of Energy Producers reached 312.3 in September, up 6% over last September. The Baker Hughes rig count in Texas was 902 in September, up from 837 rigs in September 2013. But the US rig count dropped by 4 rigs to 1,925 for the week ended November 7, although horizontal rigs gained 9 to 1,362.

One analyst, Gavekal Dragonomics, says that, if oil prices continue to fall, “drilling activity is likely to decline.” But the negative effects on the energy sector will be outweighed by the positive effect on US consumers. Lower prices will lift net exports. And each one-cent drop in gasoline prices puts $1 billion in the pockets of consumers over a one-year period.

Dr. Harold Hunt, professor at the Texas A&M Real Estate Center, recently presented an analysis of how falling oil prices affect the Houston economy. Here is a link to the Powerpoint of his presentation: Hunt_S_TX_College_Oct__2014___.pdf Dr. Hunt notes the declining cost of drilling in the Eagle Ford, lowering the break-even price of oil:

Down-sizing of well spacing has also maximized the value of Eagle Ford acreage:

Dr. Hunt also notes the increased rates of initial production in the Eagle Ford, but also the increase in decline rates of those later wells:

His conclusion: 80% of shale oil resources in the US can make money with oil at $50 to $80 per barrel:

Much depends on where the acreage is in the play. There are good sections and bad sections in the Eagle Ford, as in all fields. Those producers on the margins will suffer at $80 prices. And investors may be more wary of putting their money in areas with higher risk.

Austin Energy, the City of Austin’s municipally owned electric utility, recently announced a deal with Recurrent Energy to buy up to 150 megawatts of electricity from a solar farm to be constructed by Recurrent in West Texas, at 5 cents per kilowatt hour, guaranteed for 20 years. Austin Energy is the nation’s 8th-largest municipal utility. As reported in the Austin Chronicle, the deal means that Austin Energy could reach its goal of 200 megawatts of solar power by 2020 well ahead of schedule. Austin Energy has its own solar farm in Webberville that can generate up to 30 megawatts. Austin Energy’s current plans provide for increased reliance on renewable energy sources:

The cost of solar electricity has now become competitive with other fuels — although still with support from tax credits. Austin Energy’s estimate of its fuel costs:

Wind (West Texas): 2.6-6.1 cents/kWh

Wind (South Texas): 3.6-7.5 cents/kWh

Solar (West Texas): 4.5-11.4 cents/kWh

Combined Cycle (Natural Gas): 6-9 cents/kWh

Solar (Local): 9.0-21.3 cents/kWh

Coal: 9.2-11.4 cents/kWh

Biomass: 10-15.4 cents/kWh

Geothermal: 10-15.1 cents/kWh

Nuclear: 11.6-15.6 cents/kWh

Solar beats nuclear, coal and natural gas, even at the presently low cost of natural gas.

If Austin Energy gets 250 megawatts of solar on line, it will constitute about 10% of its total capacity. Two hundred fifty megawatts can supply electricity for about 125,000 Austin residences under normal conditions.

Austin Energy also has contracts for 850 megawatts of electricity from wind.

The availability of wind and solar power to Austin was largely made possible by the state’s CREZ project, the construction of transmission lines from West Texas over the last several years to make wind and solar resources, abundant in West Texas, available to the urbanized areas around Dallas, San Antonio, Austin and Houston. At a cost of $5 billion, the CREZ lines will eventually transmit more than 18,000 megawatts of power from West Texas and the Panhandle to metropolitan areas of the state.

Here are two emerging technologies that could change how we might use natural gas to fuel our cars and electrify our homes and offices.

A company called Redox Power Systems is building a plant in Florida to produce The Cube, a dishwasher-sized system that generates electricity from natural gas using electro-chemical fuel cell technology.

With almost no moving parts, The Cube can provide enough electricity to power a gas station or a small grocery store. It also generates heat that can be used to heat a home or business. It’s technology was developed at the University of Maryland. The system also emits carbon dioxide, but according to a review by MIT, its emissions should be lower than those associated with power from the grid. Redox plans to complete a 25-kilowatt prototype and start selling complete systems by the end of this year.

A company named Siluria Technologies is making low-carbon gasoline from natural gas using a catalyst grown from a genetically modified virus. Siluria claims that its gasoline carries half the carbon footprint of gasoline refined from oil, and that it can produce gasoline for about $15 a barrel, not counting the price of the natural gas consumed. According to Sliuria’s website: “At commercial scale, Siluria’s process will enable refiners and fuel manufacturers to produce transportation fuels that cost considerably less than today’s petroleum-based fuels, while reducing overall emissions, NOx, sulfur and particulate matter. Fuels made with Siluria’s processes are also compatible with existing vehicles, pipelines and other infrastructure and can be integrated into global supply chains.”

In November, Texas Monthly hosted a panel discussion at Rice University’s Baker Institute for public policy about the boom in shale oil development in the US. The panel members: Arthur E. Berman, a Sugar Land-based geologist; Scott W. Tinker, the director of the Bureau of Economic Geology at the University of Texas at Austin; and Kenneth Medlock III, an energy fellow at the Baker Institute. You can watch the panel discussion on Texas Monthly’s website, here. It’s worth an hour of your time.

These guys know a lot about energy in general and oil and gas in particular. I have previously written about Arthur Berman, a “shale skeptic,” who has never believed that the shale boom would last. Scott Tinker is the narrator of the documentary “Switch,” an examination of the modern world’s thirst for and sources of energy. In addition to the film, Dr. Tinker has created a website, http://www.switchenergyproject.com/, that provides additional short videos and other resources to further explore questions surrounding energy, including carbon capture, global warming, hydraulic fracturing, and alternative energy technologies. He interviews many world experts on global energy issues. He is to my mind one of the most even-handed and level-headed thinkers and explainers of the complex issues surrounding energy issues.

I have recently seen articles predicting the end of the shale boom, coming not only from those who have consistently predicted that shale production would never amount to anything, but also from respected sources whose predictions have previously proven accurate. A recent Houston Chronicle article quotes from a paper written by Amy Myers Jaffe, executive director for energy and sustainability at the University of California, Davis, and Mahmoud El-Gamal of Rice University, saying that “The most likely scenario – absent war – is for oil prices to decline significantly.” A significant decline in oil prices would make many if not most wells shale wells now being drilled in the Eagle Ford and Permian areas of Texas uneconomical. Jaffe expects oil prices to decline in the next three to five years. “To hold up prices it would have to be a regime change in several countries that results in lasting civil wars with lots of infrastructure being blown up,” she said.

An article in Business Week says that the break-even price for profitability in the Cline Shale play of the Permian Basin is $96 per barrell; in the Eagle Ford, it’s $78/barrel, and in the Bakken, $84. Here is one analyst’s prediction of future oil prices:

Falling fuel demand is a big part of the prediction. Jaffe believes demand will fall even with continued growth in China and other emerging nations. The average fuel economy for new vehicles in the US is up 4.7 mpg since October 2007. And Americans are driving less. Lower-priced natural gas will replace some of the oil demand. From the Energy Information Administration:

And, as with natural gas in the latter part of the last decade, US crude oil production and resulting supply are increasing:

EIA has begun publishing a new report, its “Drilling Productivity Report,” focusing on production in the six major shale plays in the US. The report appears to me to highlight two attributes of shale plays: first, companies are lowering the cost of drilling and completing wells in these plays, increasing the efficiency of putting new production online; and second, the industry has to continue to drill wells to replace the rapid decline in production from these plays. Here are a couple of the EIA’s charts from its recent analysis of Eagle Ford wells that illustrate these attributes:

This shows that fewer rigs are needed to continue the increase in production from the Eagle Ford.

On the other hand, it takes continuous drilling to replace the decline in existing production:

The above chart tells me that, if and when oil prices decline, the growth in oil production from the Eagle Ford will quickly turn into a rapid decline, when rigs leave the play.

I subscribe to the Economist, and it recently sent its subscribers a booklet, Pocket World in Figures, that contains rankings of 198 countries in categories ranging from longest river to biggest cities to number of refugees to living standards, etc. Here are some interesting statistics related to energy from that booklet:

Top 10 Oil Producers 2012 (‘000 bbls/day)

Saudi Arabia 11,530

Russia 10,643

U.S. 8,905

China 4,153

Canada 3,741

Iran 3,680

UAR 3,380

Kuwait 3,127

Iraq 3,115

Mexico 2,911

Top Ten Oil Consumers 2012 (‘000 bbls/day)

U.S. 18,555

China 10,221

Japan 4,714

India 3,652

Russia 3,174

Saudi Arabia 2,935

Brazil 2,805

South Korea 2,458

Canada 2,412

Germany 2,358

Top 10 Natural Gas Producers 2012 (billion cubic meters)

U.S. 681.4

Russia 592.3

Iran 160.5

Qatar 157.0

Canada 156.5

Norway 114.9

China 107.2

Saudi Arabia 102.8

Algeria 81.5

Indonesia 71.1

Top 10 Natural Gas Consumers 2012 (billion cubic meters)

U.S. 722.1

Russia 416.2

Iran 156.1

China 143.8

Japan 116.7

Saudi Arabia 102.8

Canada 100.7

Mexico 83.7

U.K. 78.3

Germany 75.2

In coal production, China ranked 1st (2012), with 1,825 million tonnes oil equivalent, with the U.S. a distant second at 515.9.

The U.S. ranks 30th in number of cars owned per 1,000 population (2011), behind countries such as Australia, Germany, France, Norway, Spain, and the Czech Republic.

In 2011, China produced 14,485,000 cars. Number two was Japan at 7,159,000. The U.S. ranked 6th, at 2,966,000, behind Germany, South Kora and India (3,054,000).

China ranked 1st in emissions of carbon dioxide in 2009 (7,687 million tonnes). Following it (in order): U.S. (5,267 million tonnes), India (1,979), Russia (1,574), Japan, Germany, Iran, Canada, South Korea, and South Africa. In the rank of carbon dioxide emissions per person, U.S. ranked 10 (17.3 tonnes per person). The leader was Qatar at 44 tonnes per person, followed by Trinidad & Tobago, Kuwait, Brunei, UAR, Aruba, Bahrain, Luxembourg and Australia.

Texas pumped 2.575 million barrels of oil per day in June, exceeding Iran’s production of 2.56 million barrels/day. Texas now ranks ahead of seven members of OPEC in oil production.

The U.S. is now the world’s largest exporter of refined fuels, including gasoline and diesel. The U.S. met 87 percent of its energy needs in the first five months of 2013. This is expected to be the highest annual rate since 1986. Net imports of oil and petroleum products will fall to 5.4 million barrels a day by 2014, down from 12.5 million in 2005, according to the Energy Information Administration. It is expected that the U.S. will pump 7.75 million barrels/day by the end of the year. West Texas Intermediate’s price is now above $107/bbl.

Meanwhile, the Houston Chronicle reported that a “growing number of experts” are now saying that the increased production of oil will result in a significant decline in prices. Amy Myers Jaffe, executive director for energy and sustainability at the University of California at Davis, recently wrote that “The most likely scenario – absent war – is for oil prices to decline significantly.” She sees a repeat of the decline in oil prices from the 1980s. If you superimpose a curve of oil prices from the 1980s over today’s price curve, “we’re already on the other side of the hump,” said Jaffe. The decline will be a result of rising supplies and falling fuel demand, exacerbated by higher fuel prices, less driving, less demand from emerging nations like China, the rising dollar, replacement of oil with cheaper natural gas, and OPEC’s inability to cut production enough to prop up prices. “Don’t lose sight of the fact that [oil prices are] a cycle. We get in this mania that whatever the price is it’s going to be that forever.”

A recent editorial in the Houston Chronicle makes a good point: we should no longer think of “oil and gas” together. Their paths have diverged, at least in the US.

The prices of oil and gas used to be roughly equivalent, based on their energy value – their Btu content. But since the shale revolution in the US, this is no longer the case. Today, gas is much cheaper than oil on an energy-equivalent basis. Today, most exploration companies have moved from gas shale plays to oil shale plays, chasing the higher oil price. But gas prices have recently risen, and wells are still being drilled profitably in the Marcellus. If gas returns to $5-6/mcf, shale gas plays will return, and gas will still be much cheaper than oil.

Second, gas is a clean-buring fuel, unlike oil or coal. US emissions of greenhouse gases have declined substantially since utilities have gradually switched from coal to gas. Vehicles powered by gas have much lower emissions than those fueled by gasoline. Gas is touted as a “bridge fuel” in the transition from hydrocarbon to renewable sources of energy, because of its lighter environmental footprint.

So why are we still using so much oil? Principally because of the transportation sector. It is expensive to convert vehicles to burn natural gas, and there is a dearth of refueling stations in the US for natural gas. If the price of natural gas remains cheap, more and more vehicles will burn it instead of gasoline.

As the public begins to better understand the differences between oil and natural gas, and as the market’s confidence grows in the US supply of gas, the stability of its relatively low price, and its more benign environmental impact, gas should make inroads into the transportation industry.

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John McFarland

Graves, Dougherty, Hearon & Moody, P.C.

401 Congress Avenue, Suite 2200 Austin, Texas 78701

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